The U.S. Has Defaulted Before

When it comes to debt delinquency, Americans have short memories. But then so do many other countries.

As we approach the debt ceiling, the potential for the federal government to default on its debt obligations has been talked about as unprecedented. But in fact, as I wrote in January 2011 (one of several occasions in the last few years when Congress also flirted with default), there have been at least two precedents:

As Carmen Reinhart documented in her impressive chartbook of the last several hundred years of international financial crises, the United States has actually defaulted on its debt obligations before.

The first time was in 1790, the only episode Professor Reinhart unearthed in which the United States defaulted on its external debt obligations. It also defaulted on its domestic debt obligations then, too.

Then in 1933, in the midst of the Great Depression, the United States had another domestic debt default related to the repayment of gold-based obligations. Additionally, there were two episodes when a spate of American states defaulted on their debts, in 1841-42 (nine states) and 1873-84 (10 states). The havoc wreaked by these state-level defaults is part of the reason that so many states now have constitutional balanced-budget requirements.

…Countries do not like to remember embarrassing episodes of default, as Professor Reinhart and her co-author Kenneth Rogoff discovered when painstakingly compiling historical financial data for their best-seller “This Time Is Different.” As a result, countries do not keep good records of their financial blemishes, and subsequent policy makers often never learn about them.

For example, upon circulating a draft of one paper that would eventually make it into the book, Professors Reinhart and Rogoff received unhappy correspondence from a senior official in the Japanese finance ministry who was miffed because they’d accused Japan of defaulting on its debt. The Land of the Rising Sun would never do something so dishonorable, the official wrote.

Mr. Rogoff subsequently sent the official a 1942 clipping from The New York Times, which documented the forgotten default.

“Thank you,” the official wrote in apology, “for teaching the Japanese something about our own country.”

In case you’re wondering, yes, Ms. Reinhart and Mr. Rogoff were the academic pair that got some flack for an embarrassing Excel spreadsheet error in a paper about the relationship between debt levels and economic growth rates. That error (which was far from the first by a respected academic) doesn’t change the fact that they’ve probably done the most comprehensive archival data-gathering and analysis available on historical debt and default patterns. You can find detailed listings of default episodes by country and year on Ms. Reinhart’s Web site. You can read more about the 1933 episode mentioned above in this law review article about the Supreme Court’s Gold Clause Cases.

Needless to say, the fact that the United States has defaulted before does not lessen the consequences of potentially defaulting again. Not paying our debt obligations would still be a very bad thing for both financial markets and the economy overall, as we saw when the federal government came relatively close to defaulting in summer 2011.